Private equity must improve returns

Private equity will have to work harder to attract new capital by adding “real value" to businesses as the industry faces an image problem and the pressure of smaller returns.

Ian Pollard, a member of the JPMorgan advisory council and previously chairman of Just Group, cited the availability of leverage and increased cost of debt – which had weakened the competitive position of private equity bidders versus trade buyers – as the most pertinent changes to the industry following the financial crisis.

“It places greater emphasis on the capability of private equity firms to add real value to underlying businesses," he said yesterday at a conference of the Australian Private Equity and Venture Capital Association on the Gold Coast.

HarbourVest Partners principal Sebastiaan van den Berg said private equity would also have to work harder to gain access to capital.

“Investors want to see that return quicker and want to get liquidity back," he said.

Simon Walker, chief executive of British organisation BVCA, which represents private equity and venture capital, said the increased cost of doing business meant returns wouldn’t match expectations from three years ago.

Mr Pollard dismissed the suggestion that public companies disliked being sold to private equity.

He said whether a takeover offer stemmed from private equity or elsewhere was largely irrelevant. Instead, he pointed to the timing of most bids around profit downgrades or when a company was under pressure from investors as a bigger challenge.

Related Quotes

Company Profile

Mr Walker said private equity tended to communicate effectively with investors and regulators but did a “rotten job of getting through to the public", being “absolutely hated" during the worst of the financial crisis.

To restore the image of private equity, it was crucial to highlight case studies and actual examples that captured the industry’s ability to improve returns beyond simple financial engineering, he said.

Mr Van Den Berg defended the generous fees the private equity industry receives, saying “this is not a commodity business" and good remuneration was needed to attract qualified professionals.